in HUD, including the authority to make and issue rules and regulations. See 15 U.S.C. 1715(a), 1718.

Transcription

1 INTRODUCTION TO THE INTERSTATE LAND SALES FULL DISCLOSURE ACT Richard Linquanti Carlton Fields, P.A. Tampa, Florida Introduction Developers of residential or commercial property, whether they know it or not, brush up all the time against the Interstate Land Sales Full Disclosure Act, a federal statute sometimes referred to as the Interstate Land Sales Act, the Land Sales Registration Act or simply, ILSA or ILSFDA (ILSA). The Act does three basic things with respect to sales and leases longer than 5 years of property in interstate commerce. First, it prohibits certain practices, including fraud and misrepresentation. Second, it requires certain consumer-favored provisions in non-exempt purchase and sales agreements. Third, it requires registration of the subdivision with the enforcement agency for ILSA (the Office of Interstate Land Sales Registration of the US Department of Housing and Urban Development (HUD) 1 and the giving of a detailed property report to a purchaser before contract. ILSA is patterned after the Securities Law of Enacted by Congress in 1968 and substantially rewritten in 1979, ILSA does not apply to every real estate sales and lease transaction but few real estate statutes have such broad scope or effect on the real estate market as ILSA. It applies if any means of interstate commerce (e.g., radio, television, print media, telephone, the mails, or other media with interstate circulation) are used to solicit offers to buy or lease or to make offers to sell or lease real property lots. ILSA applies to commercial as well as residential property, leases longer than 5 years as well as sales, property to be improved, as well as vacant land. Although ILSA is a federal statute, in several key areas it follows state contract law. It is a relatively short statute, with little in the way of regulations, but it is by no means straightforward or obvious. It has existed for 40 years, but each economic downturn reveals new uncertainties and understandings about compliance. It is a criminal as well as a civil statute, with public agency jurisdiction and private causes of action. ILSA contains two statutes of limitations periods. Its remedies often seem to be out of proportion to the harm done by its violation. Compliance with ILSA cannot be waived (15 U.S.C. 1712). The consequences for failing to comply with ILSA are severe. Among other things, it can be a criminal act with up to 5 years of imprisonment. HUD can issue cease and desist orders and obtain injunctions against the wrongful behavior or shut down sales. It can impose civil penalties of up to $1,000 per violation. Private causes of action can be brought under a 3- year statute of limitations (15 USC 1711) and the buyer or lessee can invoke rescission rights within 2 years from the date of contract (15 USC 1703(c) and (d)). The purchaser s rights under do not merge into the delivery of the deed, 15 USC 1711(b). See Bettis v. Lakeland, Inc., 402 F.Supp (E.D.Tenn.1975). In order for ILSA not to apply, there must be a specific exclusion or exemption. Exclusions are generally matters that fall outside of ILSA s jurisdiction because ILSA does not 1 The authority and responsibility for administering and enforcing ILSA has been vested in HUD, including the authority to make and issue rules and regulations. See 15 U.S.C. 1715(a), 1718.

2 apply by definition. For example, ILSA applies to contracts, which is defined so as not to include non-binding reservation agreements with modest, fully refundable deposits. Exemptions refers to situations where ILSA does not apply in whole or in part based upon meeting the requirements of either a statutory or regulatory exemption. ILSA provides for three broad categories of exemptions (see 15 U.S.C. 1702): full statutory exemptions (15 U.S.C. 1702(a)); partial statutory exemptions (15 U.S.C. 1702(b)); and regulatory exemptions (15 U.S.C. 1702(c)). Full and partial statutory exemptions and defined regulatory exemptions are self-determining, i.e., they are automatic and cannot be applied for, so the burden is on the developer to ensure that each sale qualifies for an exemption, to determine the scope of the exemption and to maintain records demonstrating that the requirements of such exemption have been met. One of the statutory partial exemptions (the 100 Lot Exemption, 15 USC 1702(b)(1)) can be combined or piggy-backed with certain full statutory exemptions. Regulatory exemptions are those exemptions which are provided for by HUD under its regulatory authority in 24 C.F.R In addition, HUD has the authority to determine that ILSA should not apply under specific facts and circumstances pursuant to a specific application for regulatory exemption (24 CFR ), or to interpret ILSA in a private opinion (24 CFR ). Source Materials All of the primary source materials can be accessed on the internet through There, one will find the following documents and links: Registered Developers and Subdivisions Most common questions from purchasers Do's and dont's for consumers Complaints FAQs for developers Buying Lots from Developers Buying Lots from Developers (Spanish Version) Statute Regulations Exemptions There is one note of caution concerning the statutory text on the HUD website. It is the Public Law version (Public Law ), not the US Code version (15 USC 1701 et seq.). Therefore, its numbering starts with 1401 rather than 1701, and 1401, which is the common 2

3 name of the law, has no US Code counterpart. Thus, 15 USC 1701 is 1402 of the Public Law, 15 USC 1702 is 1403 of the Public Law, etc. The document labeled Exemptions is entitled by HUD Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act (Guidelines) and is an interpretive rule described as supplemental information to Part 1710 of the ILSA regulations. It describes each of the full and partial exemptions in detail, sometimes in more useful detail than either the statute or the regulations. In 1996, in response to a program to streamline government, many substantive regulations concerning ILSA were deleted from the Code of Federal Regulations. HUD s reasoning was that many provisions were not necessary given the clarity of the statute (Brief of the United States as Amicus Curiae Supporting Reversal, Pugliese v. Pukka Development, Inc., appeal to the United States Court of Appeals for the Eleventh Circuit, Case No FF). The Guidelines, which are not issued as rules, as well as other consistent public pronouncements (such as HUD s position interpreting the scope of the 1702(b) partial exemptions set forth in the amicus brief, are entitled to substantial deference under Skidmore v. Swift & Co., 323 US 134 (1944). ILSA Structure Definitions Exemptions Requirements respecting sale or lease of lots Registration of subdivisions Information required in statement of record Effective date of statements of record and amendments thereto Property report Certification of substantially equivalent State law Civil liabilities Court review of orders Limitation of actions Contrary stipulations void Additional remedies Investigations, injunctions, and prosecution of offenses Administration Unlawful representations Penalties for violations. 1717a. Civil money penalties Rules, regulations, and orders Jurisdiction of offenses and suits. Basically, one should read ILSA by starting with 15 USC 1703, 24 CFR and 24 CFR 1715, which are the basic provisions for what ILSA prohibits and what it requires. To understand the language of 1703, one must refer to the definitions in 15 USC 1701 and in 24 CFR (which includes some definitions not contained in the statute). Particular persons, projects or practices may be excluded from ILSA by virtue of the definitions. Next, determine if there is an applicable exemption by reviewing 1702 ((a) for full exemptions and (b) for partial exemptions), 24 CFR and the Guidelines for the statutory exemptions, 24 CFR and the Guidelines for the standard regulatory exemptions, and 24 CFR for individual exemptions that require a HUD determination. 3

4 Basic ILSA Coverage and 1701 Definitions Fundamentally, 1703 makes it unlawful for any developer or agent, directly or indirectly, to use interstate commerce or the mails to sell or lease of any lot not exempt under 1702 without filing a Statement of Record with HUD and the delivery of a Property Report to the buyer or lessee, or to commit fraud or be misleading in making the sale or lease. If the activity does not involve a developer or agent in the sale or lease of a lot, it is excluded from coverage by ILSA by definition. Looking at the definitions in 1701, a developer is any person who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease any lots in a subdivision (subsection (5)), and an agent is any person who represents, or acts for or on behalf of, a developer in selling or leasing, or offering to sell or lease, any lot or lots in a subdivision; but shall not include an attorney at law whose representation of another person consists solely of rendering legal services (subsection (6)). A person is an individual, or an unincorporated organization, partnership, association, corporation, trust, or estate ( 1701(2)). An indirect sale is not defined in ILSA or the regulations, but an indirect seller has been defined by case law to be one who conducts selling efforts through means other than direct, face-to-face contact with buyers. Bartholomew v. Northampton Nat'l Bank of Easton, Pa., 584 F.2d 1288 (3rd Cir.1978). Concerning the requirement that the seller be a developer or agent, it was held that ILSA did not apply to protect a buyer who was the assignee of the purchaser with whom the developer entered into the contract, Gibbes v. Rose Hill Plantation Devel. Co., 794 (F.Supp (D.S.C. 1992) against a defendant that was not the actual seller or not involved in the sale of the property or its agent, and where there was no corporate affiliation and no continuity of interests or control, Paniaguas v. Aldon Cos., Inc., 2005 WL (N.D. Ind. 2005) against a defendant that was the developer of the lots but did not sell to buyer and did not act as the agent of the seller in the sale, Tomlinson v. Village Oaks Devel. Co., LLC, 2003 WL (S.D. Ind. 2003) and Akers v. Classic Properties, Inc., 2003 WL (Oh. App. 12 Dist. 2003) ILSA applies only to transactions where there is a sale or lease. The regulations define a sale as any obligation or arrangement for consideration to purchase or lease. 24 CFR According to the Guidelines a non-binding reservation is not a sale. In order to qualify for this exclusion, HUD states that the reservation arrangement must place any money received in escrow with an independent institution having trust powers, and must be fully refundable at any time at the potential purchaser s option. An agreement which is voluntary until a certain point in time and then becomes binding unless the consumer opts out is not excluded; in order to go from reservation to contract, the consumer must take some affirmative action. It is important to understand that under ILSA, a sale is the point in the marketing process where the buyer or lessee makes the purchase decision. This is generally when the buyers signs a contract to purchase. HUD s limited acknowledgement of a exception from ILSA for non-binding reservation agreements where the reservation deposit is only a modest amount, 4

5 where the deposit is fully refundable at the election of the buyer, and where the buyer must take some affirmative step to move from reservation to contract, makes it clear that the execution of an enforceable obligation by the buyer may not be the only indication that the decision to buy has been reached. In other words, HUD understands that placing a substantial reservation deposit, or moving from reservation to contract if the buyer fails to terminate the reservation, may indicate that a purchase decision has been made in a way that makes the buyer beholden to the developer. The fact that the sale for ILSA occurs at contract and not at closing has interesting implications. Most especially, it is the time of sale that one determines the existence or not of an exemption. There are striking examples of the consequences of failing to have an applicable exemption at the time of contract. A failed exemption cannot be cured by subsequent facts, even if the closing has not yet occurred. Law v. Royal Palm Beach Colony, Inc., 578 F.2d 98 (5 th Cir. 1978). But it cuts both ways. A buyer may run through the two-year right of rescission under 1703 even before the closing occurs, just as another buyer s two-year rescission right may extend past the closing date. In cases where the defendant was the seller, ILSA requires that the sale be of a lot. ILSA does not define what is a lot. HUD has defined a lot in its regulations, 24 CFR (b) as any portion, piece, division, unit, or undivided interest in land located in any State or foreign country, if the interest includes the right to the exclusive use of a specific portion of the land. The Guidelines exclude from ILSA coverage a sale of undivided interests that does not provide the exclusive right to use the lot. HUD uses the example of a camping subdivision tenant-in-common arrangement where the campsites are available on a first-come, first-served basis. Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 127 F.3d 478 (6 th Cir. 1997) held that interests in condominium hotel were not "lots" within the meaning of the of ILSA where owners had occupancy rights only 14 days per year, and interests were encumbered with a number of use restrictions. On the other hand, the case law is now well-established that a condominium unit is a lot, Winter v. Hollingsworth Properties, Inc., 777 F.2d 1444 (11th Cir.1985); Schatz v. Jockey Club Phase III, Ltd., 604 F.Supp. 537 (S.D.Fla.1985); Nargiz v. Henlopen Devel., 380 A.2d 1361 (Del. 1977). One case in Colorado (Giralt v. Vail Village Inn Assoc., 759 P.2d 801 (Colo.App. 1988)), held that parking units are individual lots under ILSA. The court dismissed the developer s argument that parking units were not condominium units under Colorado s former condominium statute, saying that the argument was irrelevant to the correct question, which is whether they are lots within the meaning of [ILSA]. However, in a case in the District Court in the Southern District of Florida, the court held that transferable limited common elements are not lots for ILSA purposes, Trotta v. Lighthouse Pt. Land Co., LLC, 2008 WL (S.D. Fla. 2008). If there is a developer or agent who makes a sale of a lot, ILSA will still not apply unless the lot is in a subdivision. The concept of subdivision is important not only for general ILSA coverage; it also forms the basis of several full and partial exemptions, for example the full exemption for the sale of fewer than 25 lots ( 1702(a)(2)) and the partial exemption for the sale of fewer than 100 lots ( 1702(b)(1)) in a subdivision. ILSA does not use the term subdivision in the sense that the real estate industry does. Section 1701(3) defines subdivision to mean any land that is located in any state or in a foreign country and is divided or is proposed to be divided into lots, whether contiguous or not, for the purpose of sale or lease as part of a common promotional plan. There is no implied geographic radius in the statute, regulations or cases to be used in interpreting the permissible degree of non-contiguity. Even such a thing as the historic unity of the areas may be 5

6 considered relevant factors (State v. Heck, 817 P.2d 247 (N.M. 1991)). Rather, the analysis must focus on the meaning of common promotional plan. There, contiguity plays a small role in establishing a presumption that a common promotional plan exists. Common promotional plan is defined in 1701(4) to mean any plan undertaken by a single person or group of persons acting in concert, to offer lots for sale or lease. The definition includes a rebuttable presumption that a common promotional plan exists if the land offered by a developer or a group of developers acting in concert is contiguous or is known, designated, or advertised as a common development or by a common name. The number of lots covered by each individual offering has no bearing of whether or not there is a common promotional plan. The Guidelines list several characteristics to evaluate whether or not a common promotional plan exists including, but not limited to, the following: 10% or greater common ownership; same or similar name or identity; common sales agents, common sales facilities; common advertising; and common inventory. These characteristics are not conclusive; rather, they are indications of the presence of a common promotional plan. Common ownership is fairly straight forward in most cases. Using common agents is a bit trickier. Independent brokers selling lots for different individuals who are merely receiving the usual real estate commission for such sales is, according to HUD, not sufficient by itself. Some coordinated effort seems to be required. Several cases have been brought against regional or national homebuilders to try to combine their disparate projects because they are advertised under a common brand or are advertised on a common website. Such a case was brought against Toll Bros. in the Trotta case. There, the court concluded that there was not a common promotional plan where the projects are on separate sites, maintained separate sales offices, conducted separate advertising campaigns, and filed separate registrations with the state regulatory authorities. In Tomlinson v. Village Oaks Development Co., LLC, 2003 WL (S.D.Ind. 2003), plaintiffs brought suit against the subdivision developer although they bought their lot from a homebuilder to which the subdivision developer had sold several lots for resale. The court concluded that the subdivision developer did not act as the agent of the homebuilder, although both the subdivision developer and the homebuilder were identified in the same marketing brochure. Their separate roles in the development were clearly identified. The court concluded that they were not acting in concert. In Orsi v. Kirkwood, 999 F.2d 86 (4 th Cir.1993), the buyers purchased their home from a builder that had itself bought certain lots from the subdivision developer. The court concluded that the subdivision developer and the builder did not act in concert. Among the factors that the court looked to were that the lot sales from the subdivision developer to the homebuilder were at arms-length, neither party had a financial interest in the other, there were no common officers or directors, and the sales brochure that listed the lots of both the subdivision developer and the homebuilder was prepared by the broker at its own expense and without approval by the subdivision developer or the homebuilder. In language that warms the heart of every small custom home builder who buys lots wholesale from a subdivision developer, the court said that [t]o stretch the Act to such an extent would drown the small developer in a sea of federal regulation. On the other hand, in Paniaguas, plaintiffs argued that the number of units in 2 subdivisions under common ownership and with the common name of Fieldstone should be aggregated as a single subdivision for ILSA purposes. The court found there was a material issue of fact. Plaintiffs then tried to combine the lots in the Fieldstone subdivision with others under the common name of Northwoods because the same model home was used to promote both sets of subdivisions, and a copy of the Northwoods covenants was supplied as an example 6

7 of what the Fieldstone covenants would look like. The court found that those allegations also established a genuine question of fact. Section 1702(a) Full Statutory Exemptions The Guidelines provide a useful discussion of each of the 1702(a) full exemptions from ILSA, which are: (1) Twenty-Five Lots (2) Improved Lots (present and future) (3) Evidences of Indebtedness (4) Securities (5) Government Sales (6) Cemetery Lots (7) Sales to Builders (8) Industrial or Commercial Developments 25-Lot Exemption (15 USC 1702(a)(1)) - exempts a subdivision or common promotional plan that contains fewer than 25 lots. If the subdivision has lots that are permanently not going to be marketed, such as a lot containing a clubhouse, those lots are not counted. Note that prior to the 1979 amendments to ILSA, developments of less than 50 lots were not covered by ILSA, as the term subdivision formerly required a division of land into 50 or more lots, so be careful to understand this history when reading older cases. Improved Lots Exemption (15 USC 1702(a)(2)) exempts lots on which there is a completed building or where the developer is obligated to construct a completed building within 2 years from the date of the contract. This exemption is the subject of a detailed analysis by other papers at this conference. The regulations allow a limited pre-sales condition that permits the developer to terminate all contracts within 180 days if a presales number is not met (24 CFR ). There are two ways to satisfy this exemption. The first exemption is for a completed building. The Guidelines interpret this to mean a habitable structure, not for example, a mobile home pad with utilities but no dwelling. Completion is established by the issuance of a certificate of occupancy. If the residence is not completed on the date the contract to purchase is executed, this first test is not met. The 2-year obligation to construct is measured from the date that the consumer enters into a binding obligation to purchase. Orpheus Investments, S.A. v. Ryegon Investments, Inc., 447 So.2d 257 (3 rd DCA 1983). Sale occurs upon contract formation Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10 th Cir. 1980). Note that the exemption is tied to a contractual obligation on the date the contract is executed, not if the developer actually completes construction within 2 years from the date of contract. See Nargiz v. Henlopen Developers, 380 A.2d 1361 (Del.Supr.1977). As previously stated, the key is to focus on the facts that exist when the consumer makes a decision to buy. By extension, it ought to be the case that if the developer makes the required promise to construct within 2 years but fails to do so, the exemption applies (provided the promise was made in good faith and not merely with the intent to avoid the statute), although the buyer has a breach of contract claim for specific performance and damages. The remedies are a matter of state contract law and do not necessarily include a right of rescission. 7

8 The obligation to complete construction within 2 years must be absolute under state contract law principles. Some cases hold that the remedies available to the purchaser for default of this obligation may not be limited. Other cases allow the developer more flexibility. Since state rather than federal law applies to the determination, there may be slight differences from jurisdiction to jurisdiction. The Florida Supreme Court has said that a purchaser must have all of the remedies available at law or in equity. Otherwise, there is only an illusory obligation to complete construction within two years. Samara Development Corp. v. Marlow, 556 So.2d 1097 (Fla. 1990). The need to provide all available legal and equitable remedies may not be as unforgiving as it appears. Hardwick Prop. Inc. v. Newbern et al., 711 So.2d 35 (FLA 1 st DCA, 1998) held that a contract that granted to the buyer the right to the remedies available at law or in equity, but specifically not to consequential or special damages, did not as a matter of law fail to satisfy ILSA s exemption because, if actual damages were substantial, the promise to complete construction would not be illusory. In Rondini v. Evernia Properties, LLLP, 2008 WL (S.D. Fla. 2008), a federal court held that a provision giving the purchaser a right to seek specific performance or if specific performance is not available, the right to seek actual damages was enough of an obligation to satisfy the exemption. This finding in Rondini may be skating very close to the edge and other courts could disagree with its conclusion. Another exception to the absolute obligation is the defense for impossibility or impracticabililty of performance. It is a matter of state law what circumstances excuse performance under general contract principles. See Restatement of Contracts, Second, 261 et seq. In Florida, cases hold that new and unanticipated fees and taxes are foreseeable (City of Key West v. R.L.J.S. Corp., 537 So.2d 6541 (3 rd DCA 1989)), that whether a dispute arising was foreseeable or not is a triable question of fact (Walter T. Emrby, Inc. a. LaSalle Nat l Bank, 792 So.2d 567 (4 th DCA 2001)) and that very expensive alternative performance did not render a contractual obligation impossible and the foreseeability of the difficulty of obtaining insurance made the defense of frustration of purpose unavailable (Home Design Center JV v. County Appliances of Naples, Inc., 563 So.2d 767 (2 nd DCA 1990)). In Fortunato v. Windjammer Homebuilders, Inc., 2006 WL (M.D. Fla. 2006), the court held under ILSA that a provision that the developer would complete construction as soon as practicable, subject to the availability of labor and supplies did not satisfy the obligation to build necessary for an exemption. In Stein v. Paradigm Mirsol, LLC, 2008 WL (M.D. Fla. 2008), the court held a more typical force majeure clause ( for any delay caused by acts of God, weather conditions, restrictions imposed by any governmental agency, labor strikes, material shortages or other delays beyond the control of Seller ) contained exclusions broad enough to seriously undermine the obligation to complete the condominium within two years. It is striking that the majority of cases involving force majeure or impossibility under ILSA involve challenges to the contractual language and the recitation of facts that provide the developer with an out, rather than to the actual occurrence of an event. Although it may be emotionally satisfying for the developer to read a long list of things that might excuse his timely performance, it is a legally riskier strategy to provide the list rather than to simply reserve the contractual defenses provided by law for impracticability or impossibility. Builder Exemption (15 USC 1702(a)(7)). This exempts a sale to a person who engages in the business of constructing a residential commercial or industrial building. The Guidelines make it clear that there must be a business function, not an isolated transaction. By contrast, the sale of a lot to a person who then intends to build his own house does not qualify for exemption. Finally, HUD takes the policy position that a sale to a person who is not licensed 8

9 as a broker is not exempt, even if he is buying the property as an investment and vaguely plans to sell it in the future. Industrial/Commercial Development (15 USC 1702(a)(8)). This exemption is not so broad as to make ILSA only applicable to residential property. There is a two-part test. First, the property must be zoned commercial or industrial or there must be recorded covenants limiting the property to these uses. Second, there are a number of fact-specific requirements that must be met. There must be legal access from the property boundary to the public street. The purchaser must be a legal entity and have been set up, in fact, as a business entity. The Guidelines interpret this to mean that the entity has set up an administrative structure with checking accounts, licenses, and accounting records. The buyer/lessee must actually be engaged in commercial or industrial business. It must be represented in the transaction by its own representative (including attorneys but possibly not a transaction broker or a listing broker since they are not agents of the purchaser). The buyer must affirm in writing to the seller that it meets the requirements mentioned above. If the affirmation is in a form contract, the provision must be initialed by the buyer. The seller is advised by the Guidelines to keep the affirmation for the longer of 3 years or the statute of limitations of the local jurisdiction. Finally, the exceptions to title must be approved in writing by the purchaser and there must either be a title insurance policy, a title opinion, or a signed waiver in a separate document. Few commercial sales transactions will be conducted without title insurance (the same cannot be said of leases, however), so the thing that merits care here is the requirement that the exceptions to title be affirmatively approved by the buyer in writing, not by failure to object within a prescribed period of time. Section 1702(b) Partial Statutory Exemptions The Guidelines also provide an extended discussion of each of the 1702(b) partial exemptions from ILSA, which are: (1) One Hundred Lot Exemption (2) Twelve Lot Exemption (3) Scattered Site Exemption (4) Twenty Acre Lots Exemption (5) Single-Family Residence Exemption (6) Mobile Home Exemption (7) Intrastate Exemption (8) Metropolitan Statistical Area (MSA) Exemption Much of 2008 was spent by ILSA specialists analyzing and critiquing a trilogy of cases from the Southern District of Florida which addressed what it is that partially exempt projects are exempt from. Pugliese v. Pukka Devel., Inc., 2007 WL (S.D. Fla. 2007), Meridian Ventures, LLC v. One North Ocean, LLC., 2007 WL (S.D. Fla. 2007) and Trotta v. Lighthouse Pt. Land Co., LLC, 2008 WL (S.D. Fla. 2008) concluded, unlike an earlier Florida state court case, Mayersdorf v. Paramount Boynton, LLC, 910 So.2d 887 (Fla. 4th DCA. 2005), that ILSA 1702(b) itself states what parts of ILSA do not apply, namely the provisions requiring registration and disclosure (as specified in section 1703(a)(1) and sections 1704 through 1707) shall not apply. The consequence of the courts determining the scope of the exemption based on the language of 1702(b) ( the provisions requiring registration and disclosure (as specified in 1703(a)(1) and 1704 through 1707) shall not apply ) rather than the language of 1703(b) or 9

10 (d) ( Any contract or agreement for the sale or lease of a lot not exempt under section 1703 ) was that everything in 1703 except 1703(a)(1) became relevant to partial exempt projects -- the purchaser s right to a 7-day rescission period ( 1703(b)), the requirement that the contract provide a legal description appropriate for recording, a 20-day period of notice and right of the purchaser to cure a default, and a limitation of damages for the developer or the greater of 15% of the purchase price or actual damages ( 1703(d)). This was an urgent concern since a failure of the contract to contain those provisions, whether or not relevant to the transaction, was fatal to the enforceability of the contract and there was no way to remedy it. Since these cases were decided as Florida s real estate wheels were falling off, the Pugliese line of cases may have actually contributed to the speed and intensity of the crisis. This is an interesting structural element of ILSA. In a generally good economy, market forces do not encourage people to walk away from their contracts and do not lead to much in the way of actual damages upon breach since market values are not declining. But as we have recently experienced, when real estate speculation is driving the economic engine, the peak of the bubble is just months before the crash. Those very purchase contracts that fueled the speculation in its greatest frenzy, those entered into during the last 2 to 3 years before the bubble bursts, whether the contracts have closed or are pending closing, are protected by ILSA s rights of rescission and class action suits. The developer does not have a chance. In a typical condominium development in South Florida, the developer met significant pre-sales requirements 60% would not be atypical. Developers received 10%-20% downpayment deposits on those pre-sale contracts. In the last year of the strong market, perhaps 35-40% of the units actually closed. The construction loan has been near fully disbursed, and the developer has repaid 25% of the loan from closings. When the downturn begins, speculators start to get nervous nervous that they have overpaid, nervous that their purchase prices will not appraise, nervous that they will not be able to flip their contracts before closing, nervous that they cannot sell their old property to be able to afford the new one. A plaintiff s counsel comes along with ILSA in hand and the developer is faced not so much with a softening of his market as a re-writing of history as the developer becomes the defendant in a class action lawsuit to rescind all of the closings that have already occurred in the last 3 years and revoke all the remaining pending contracts. In Atteberry v. Maumelle Co., 60 F.3d 415 (8 th Cir. 1995), for example, there are 178 listed plaintiffs seeking to represent a class of two thousand purchasers. In one case where my Firm represents the lender, 100 of the 145 contracts are in litigation). The developer doesn t have the sales proceeds, the bank does. The bank is still hanging out on 75% of its loan. The market is not producing replacement buyers. The developer cannot just adjust to the new market conditions. Of course, much more is going on than the existence of ILSA, but the point is that ILSA seems to assume that the developer can absorb the loss, whereas in truth those holding the bag seem to be the lenders, the purchasers who bought more than 2-3 years ago, and the condo associations in the failed projects. All this was a stake in the Pugliese line of cases when it was held that projects exempt from registration still needed to meet contract standards that developers and HUD itself long believed they did not have to. The problem was not that the courts reasoning was faulty. The confusion caused by seemingly conflicting language in 1702 and 1703 is evidence that this part of ILSA was especially poorly drafted. One can hardly fault the courts applying the specific scope provisions set forth in the section of ILSA that defines the exemption tests. He problem with the Pugliese line of cases was that developers and their counsel followed HUD s pronouncements and relied on them. Now they were being told that they could not do so, their contracts were unenforceable as a consequence, and there was nothing to be done to fix the problem. 10

11 The Eleventh Circuit resolved the issue, for now, by reversing the District Court in Pugliese v. Pukka Development, Inc., 550 F.3 rd 1299 (11 th Cir. 2008). And since the Eleventh Circuit s decisions rests at least in part on the deference due to HUD on ILSA interpretation (arguments especially advanced by Bill Sklar in the Trotta suit) rather than on the dubious assertion that the language in 1702 and 1703 are clearly harmonious, that would seem to increase the chances that other federal district and circuit courts will follow the final Pugliese result. But transactional lawyers outside the Eleventh Circuit cannot dismiss the possibility that the Pugliese issue about the scope of the 1702(b) exemption may be raised in their jurisdiction. After all, the District Court for the Southern District of Florida was not the only federal court to conclude that projects exempt under 1702(b) need to comply with all of 1703 with the exception of registration under 1703(a)(1). See Stockton v. Mustique, LLC, 2007 WL (S.D. Ala. 2007) for a similar decision. 100 Lot Exemption (15 USC 1702(b)(1). This is a case where one cannot be guided by the title of the exemption in the Guidelines, because the exemption is for subdivisions with fewer than 100 non-exempt lots. The wording of the statute makes it clear that before one counts number of lots for purposes of this exemption, the lots exempt from the Act are first excluded from the equation. This way of counting the lots, ignoring the exempt ones, is not appropriate in other instances. For example, the 25-lot exemption under 15 USC 1702(a)(1) is for the total lots in the subdivision not the otherwise non-exempt lots. Conversely, the 25-lot exemption cannot be used in piggyback with the 100-lot exemption (Guidelines, Part V(a)). If the project has 100 lots or more, but some of those are exempt from the statute as sales to builders, government sales or the like, a 110 lot subdivision may have only 99 or fewer non-exempt lots. The Guidelines point out that the developer bears the risk of being certain that all lots in excess of 99 are exempt from the Act, because if they are not the registration exemption is nullified for prior and future sales. The 99 lots do not need to be specified in advance. Beyond that, the law is not clear. In one Florida case, the developer was held to have failed to comply with ILSA although he only built a 98 unit condominium because when he entered into sales contracts, he contemplated there would be 108 units and marketed on that basis. Grove Towers, Inc. v. Lopez, 467 So.2d 358 (3 rd DCA 1985), rev. den. 480 So.2d In N & C Properties v. Windham, 582 So.2d 1044 (Ala. 1991), the developer s reserving the right to build and market a second phase of development took the unit count over 100 for ILSA purposes although he was only building and offering the first phase for sale. This case highlights that one cannot market 99 units at a time and be exempt serially. HUD has issued private HUD Advisory Opinions confirming that piggyback exemptions can be structured properly. Obtaining such an Advisory Opinion under 24 CFR is the only safe way to proceed. It is an as-yet unanswered question if a failure to satisfy the improved lot exemption requirements in advance can be cured by stopping the marketing at 99 lots until construction has advanced to the stage that the developer can fix future contracts to comply with the improved lot exemption. In other words, can one do exactly what the HUD Advisory Opinions allow, if it is done by accident rather than by intent? The Grove Towers and N & C Properties cases suggest that it is difficult, if not impossible, to thread this needle without a prior conforming marketing plan. Single-Family Residence Exemption, (15 USC 1702(b)(5)). This registration exemption applies to lots in a subdivision where there is local governmental oversight as to use and 11

12 infrastructure and the purchaser is protected by certain devices such as by an on-the-lot inspection before entering into any contract. Note that although a condominium unit is a lot for purposes of ILSA, condominium units in a building containing more than 4 dwellings cannot qualify for this exemption. The exemption is covered by an extensive number of provisions in the statute, in the regulations (24 CFR ) and in the Guidelines (Part V(b)(5)), and must be read carefully. There are both subdivision requirements and lot requirements. Subdivision Requirements. The subdivision must meet all local codes and standards. There may be no offers of gifts, trips, dinners or other promotional techniques to induce a visit to the subdivision by prospective purchasers. According to the Guidelines, but not the statute or the regulations, the subdivision requirements must be met from the beginning; once again, one cannot cure a problem. Lot Requirements. There are 8 lot requirements, each of which must be met. The lot must be in an area of local government where there are specific minimum legal standards for development of subdivision lots and the lot must comply with those standards. The regulations list standards that must be governed: dimensions, plat approval and recordation, roads and access, drainage, flooding, water supply and sewage disposal. The lot must be zoned or covenanted for only single-family residences. The statute seems to say this test must be met by each lot in the subdivision, but HUD states in its regulations that only the lots for which an exemption is claimed must meet this standard (24 CFR (c)(2)). The lot must be on a paved street that meets local government standards. Paved is defined by regulations to mean impervious hard surface and exclude hard packed dirt and gravel. If the roads are not complete, their completion must be bonded or secured to the satisfaction of the local government. The roads must either be maintained by a unit of government or by a homeowners association, and in the latter case the purchaser must receive a written disclosure, before signing a contract, of the estimated maintenance cost for the first 10 years. Potable water, sanitary sewage disposal and electricity must be available on or with lines to the lot or if they are not, the local government must be obligated to supply them within 180 days after closing. Note that there is nothing in this case about those utilities being provided by the developer, and the Guidelines make it clear that an obligation for the developer to complete installation is not adequate. They do give the developer some leeway to supply septic tank approval before the closing if all earnest money deposits are escrowed. Closing with a transfer by deed must occur within 180 days of signing the purchase contract. There must be a title policy or title opinion at closing, with any exceptions being approved in writing by the purchaser before closing. Finally, the purchaser or spouse must make a personal, on-the-lot inspection before any contract is signed, and the developer must make no offers of gifts, trips, dinners or other promotional techniques to induce a visit to the lot. Intrastate Exemption, 15 USC 1702(b)(7)). This exemption is narrow, and both the statute and the regulations (24 CFR ) contain extensive details of the requirements that must be met, including among them The sale of lots must be intrastate in nature An on-the-lot personal inspection by the purchaser The lot is sold free and clear of liens and encumbrances 12

13 Certain written disclosures by the developer prior to the contract concerning utilities and infrastructure A 7-day rescission period after contract signing The purchaser s written receipt before signing the contract of developer s written disclosures of the cost to provide utilities to the lot Developer s making certain title disclosures, again before any contract is signed, about taxing districts and associations with lien rights. In order to be intrastate in nature, all sales must be to residents of the state in which the land is located unless the lots are exempt from the statute or are exempt from registration as mobile homes or under the regulation exempting subdivisions of fewer than 300 lots within a standard metropolitan statistical area (SMSA) (15 USC 1702(b)(8)). The regulations repeat and to some extent expand upon these requirements, 24 CFR For example, a lot is not sold free and clear of liens and encumbrances if it is subject to servitudes that do not apply to all lot owners uniformly. An assessment that does not apply to the developer the same as any other owner violates this requirement, even if the distinction is one that the state law permits. For example, in Florida condominium law, the developer may be freed from actually paying full assessments in a condominium by capping the assessment liability of purchasers and agreeing to be bound to fund any accrued operating deficit. Another elaboration of the regulations is that the developer must release control of the association no later than when a majority of the planned lots are sold (24 CFR (a)(4)(v)), whereas in Florida, for example, the developer may control the association for a period of 3 years after 50% of the units are sold to others. The Guidelines elaborate further. A registered lot sold to a non-resident of the state would make the entire subdivision ineligible for the intrastate exemption. (Part V(g)(1)). The Guidelines provide a sample form of an acceptable intrastate exemption statement (Part V(g)(6)). Section Section 1703 is the heart of ILSA. There are 5 subsections in Section 1703, (a) through (e). Subsection (a) is the basic concept of the law. Subsection (a)(1) says that a developer cannot sell a lot without filing a Statement of Record with HUD and delivering a Property Report to the consumer before the contract is signed; subsection (a)(2) says the developer cannot commit fraud or deceit in the sale of lots or obtain money by making false or misleading statements. So (a)(1) is the registration requirement and (a)(2) is the anti-fraud rule these are the foundation of ILSA. Subsections (b) through (e) deal with sales contract requirements. The fact that they are in the same 1703 as the foundation rules lead to the confusion at the heart of the Pugliese line of cases discussed above. Subsection (b) gives the buyer 7 days to revoke the contract, and requires the contract to state that right. Subsection (c) says that if a required Property Report is not delivered before the contract is signed by the buyer, then the buyer has 2 years to revoke the contract, and requires the contract to state that right. Subsection (d) says that a contract must include certain provisions that provide a legal description of the lot, giving the buyer a 20- day notice and right to cure a default, and limiting the amount of damages against the buyer to 13

14 the greater of 15% of the purchase price or actual damages suffered by the seller, and if the contract does not contain those provisions the buyer must either receive a warranty deed within 180 days from signing the contract or he has 2 years to revoke the contract. It does not require the contract to state that right, which is an important distinction from subsections (b) and (c). Subsection (e) says that if the seller violates any of the sales contract requirements in (b) through (d), the buyer gets back all of his money if within the applicable period he tenders back a deed to the seller and returns the property in substantially the same legal and physical condition as he received it. There is no regulatory explanation of what constitutes all of the money paid by the buyer, and developers have argued that all cannot mean payments made for custom orders. However, there is no such carve out in ILSA or its regulations, and in fact all appears to mean exactly that, custom order payments and all. Certain subsections of 1703 contain their own statutes of limitations, which must be read in conjunction with ILSA s general statute of limitations contained in Subsections 1703(c) and (d) give the purchaser a right to revoke the transaction, whether or not it has closed with the delivery of a deed, for a period of 2 years from the date the contract is signed. There are a large number of cases in Florida where plaintiffs tried to exercise the right of revocation more than 2 years after the contract was signed but within the 3-year statute of limitations under Taylor v. Holiday Isle, LLC, 2008 WL (S.D. Ala. 2008) provides a detailed analysis of the arguments and concludes that a plaintiff s rescission claim requires compliance with both 1703(c) s two-year limit for exercising the right of rescission and 1711(b) s threeyear limit for filing suit based on the seller s refusal to honor said rescission. Sections Sections 1704 through 1707 specify the information required in the Property Report and the Statement of Record as well as the effect of registration and a requirement for amendments and an annual report. Full details are laid out in 24 CFR One should also consult 24 CFR Part Section 1708 Section 1708 allows HUD to accept a comparable registration under state law to substitute for a HUD filing. If the project is located in Arizona, California, Florida or Minnesota, HUD has determined that the disclosures required by the laws of those states are substantially equivalent to the HUD requirements and a separately written State of Record (registration) and Property Report are not necessary under 15 USC Note, however, that this applies only to state-approved registrations from and after the date that HUD certified the state s compliance, it applies only to registrations for land in that state, and the state-approved documents must still be filed with HUD (24 CFR ). In Florida s case, HUD s determination of substantial 2 As previously noted, ILSA is peculiar in that, when markets are strong, there is little incentive on developers to worry about the right of revocation. Sellers wish that buyers would back out because prices are increasing. As knowledge of market weakening becomes more widely known and accepted, the people who were to last ones to speculate are best able to take advantage of the seller s mistakes because theirs will be the contracts entered into during the previous 2 years. One can argue that ILSA s right of revocation makes the real estate market crash all the more quickly and is too unforgiving of developers for the benefit of speculators. Few ILSA revocation cases state facts where the plaintiff s real injury had anything to do with the developer s failing to give notice of default or trying to keep more than 15% of the deposit money, but the failure of the contract to contain those provisions is the basis for revocation. 14

15 equivalence relates only to the sale of housing lots, not condominium units, although the HUD website does not say this. Sections 1709, 1713, 1714 and 1717a Section 1709 creates a private cause of action for violation of ILSA. HUD has the power to investigate, issue cease and desist orders, seek injunctions and prosecute claims ( 1714), as well as to impose civil penalties after an administrative hearing ( 1717a). HUD s administrative procedures for hearings involving alleged violations of ILSA are set forth in 24 CFR Part Section 1710 provides an appeals process from a decision by HUD. ILSA is not pre-emptive of other statutes and remedies ( 1713) and, if fact, it is common for a civil suit to state both ILSA and state law claims. Section 1711 Section 1711 provides for a 3-year statute of limitations in the private causes of action. The nature of the allegation determines when the limitations period begins to run. For the following, the limitations period begins to run on the date that the purchase contract or lease is signed Signing a purchase contract or lease (which ILSA defines as a sale 3 ) without registering the project with HUD by a Statement of Record Signing a purchase contract or lease without delivering a Property Report to the buyer Where the Statement of Record or Property Report is false, misleading (by commission or omission) or incomplete Where advertising or promotional material is not consistent with information required to be in the Statement of Record or Property Report For the 7-day right of revocation under 1703(b) For the 2-year right of revocation where the Property Report was not provided as required in 1703(c) For the 2-year right of revocation when the contract does not contain certain required provisions in 1703(d) For the buyer s right to a refund of all money paid in connection with the exercise of the right of revocation under 1703(e). When the claim is basically one for fraud or deceit, 1703(a)(2)(A), (B) or (C), the limitations period is 3 years but begins to run when the violation is known or should have been known 3 For statute of limitations purposes, a sale might occur not only at the time of contract but also when the deed is delivered (Hadad v. Deltona Corp., 535 F.Supp 1364 (D.N.J. 1982)). However, this interpretation is the minority view. Rodriguez v. Banco Cent., 727 F. Supp. 759 (D. P.R. 1989). 15